The family business constitution: Is it a legal document or a social contract to protect wealth from dispersal?
Family businesses are the lifeblood of the economy in the Kingdom and the Gulf region, constituting the vast majority of the business sector. However, these giant entities face an existential challenge known globally as the "third-generation curse." Statistics indicate that only a small percentage of family businesses successfully transition to the third and fourth generations, while the rest fade away or disintegrate due to disputes among heirs and conflicts of interest after the founder's passing.
The major dilemma facing business families is not "how to raise money"—founders have mastered that game—but rather "how to sustain that money" and protect it from the winds of personal conflict that buffet the business entity when "family sentiment" mixes with "management decisions." This is where the "family charter," or what is known as the "family constitution," emerges as a strategic lifeline, not merely an intellectual luxury.
More than just ink on paper
Many people mistakenly believe that family governance simply means drafting rigid regulations or copying ready-made models from other companies. A successful family constitution is, at its core, a "social and psychological contract" among family members, where the rules of the game are agreed upon with complete transparency before the game even begins. It's the document that answers the difficult questions everyone avoids asking during the founder's lifetime: Who will lead the family tomorrow? How will family members be employed? Will competence or blood ties be the criterion? And what is the exit mechanism for those who don't wish to continue?
The transition from "founder's authority" to "foundation state"
In the founding stage, the founder's charisma and wisdom are the guarantee of family unity and business stability. However, relying on individuals to remain is a losing proposition; people come and go, but institutions endure. Therefore, the essence of governance lies in transforming this centralized personal authority into an "institutional framework" with governing rules that remain constant regardless of who is in charge. This transformation requires considerable courage from the first generation to relinquish some decision-making power to a "family council" or "board of directors," and a deep conviction from the second and third generations that adhering to these rules is the only guarantee for protecting and growing their stake.
Pillars of Sustainability
To ensure the success of this transformation, the legal structure of the family business must be based on solid foundations, the most important of which are:
- Separating ownership from management: The owner doesn't necessarily have to be the manager. Hiring independent (non-family) talent for leadership positions may be the boldest and most profitable decision.
- Dispute resolution mechanism: Prior agreement on amicable (family council) or legal (arbitration) methods for resolving internal disputes, to ensure that family secrets and business reputation remain out of the courts and the public eye.
- Organizing the exit: Establishing fair mechanisms for evaluating shares and purchasing shares from those who wish to exit, in a way that preserves the company's liquidity and the rights of those who wish to exit, with
